When you’re in a business like construction, you never want to leave yourself vulnerable. From natural disasters to vandalism and theft, anything can go wrong at any time - and that financial fallout can leave your business scrambling to pick up the pieces. This is why construction insurance isn’t a nice to have, it’s a necessity.
Thankfully, a lot of insurance companies offer specific policies made for contractors, but it can be overwhelming trying to find the policies you need. To simplify your search, we’ve rounded up the most common types of construction insurance for general contractors and subcontractors.
Key Takeaways
- If you want to present a green flag to project owners and other stakeholders, you need construction insurance. In fact, many construction projects require you to carry the right liability coverage. For example, workers’ comp is required by law in most states.
- The cost of construction insurance isn’t always straightforward. Your insurance provider will consider several things, including your claims history and safety record when building your quote(s).
- Working with an insurance provider that specializes in construction insurance can help you bundle multiple policies together.
10 Types of Construction Insurance You Should Consider for Your Business
Generally speaking, your construction business’ insurance needs will be met with these types of insurance policies.
1. General Liability Insurance
What is general liability insurance?
Also known as commercial general liability, this type of construction insurance protects construction companies against financial loss from third-party claims. These kinds of claims can include property damage, injury, or other issues caused by a contractor’s work.
Why do you need it?
In most states, general contractors need some level of general liability coverage to get a contractor's license. If you’re a subcontractor, you might also be required to hold general liability insurance to work for certain GCs.
What risks does it cover?
General liability insurance covers risks like:
- Third-party property damage
- Third-party bodily injury on the job site and associated legal fees
- Defamation advertising
2. Workers' Compensation Insurance
What is workers’ compensation insurance?
Workers’ comp insurance protects both your business and your employees. If someone gets hurt on the job, this covers any related medical expenses and lost wages, so you don’t have to pay directly out of pocket.
Why do you need it?
Most states require businesses with a certain number of employees to purchase workers’ compensation insurance. You may have to provide this information to the state.
Benefits of workers’ comp
Workers’ comp isn’t just about meeting state requirements, it’s also just good business sense. If one of your team members is injured, workers’ compensation allows them to recover without worrying about medical bills (and allows you to keep projects moving forward).
3. Builder's Risk Insurance
What is builder’s risk insurance?
Builder’s risk insurance (or course of construction insurance), provides insurance coverage for projects while they’re under construction. If a building is currently being constructed or remodeled, it’s protected under builder’s risk insurance.
Who needs it?
Typically, both owners and general contractors hold builder’s risk policies.
What does it cover?
A basic builder’s risk policy covers physical damage from fire, windstorms, vandalism, or theft to the following:
- Buildings and their foundations
- Scaffolding and other temporary structures
- Paving and fencing,
- Machinery and equipment
4. Commercial Auto Insurance
What is commercial auto insurance?
Commercial auto insurance protects company vehicles and equipment like forklifts and excavators from damage.
Why do you need it?
If you’ve bought a vehicle or piece of equipment for your employees to use, you’re required by law to hold commercial auto insurance.
What does it cover?
Your commercial auto insurance policy covers commercial vehicles and equipment in the event of:
- Accidents
- Medical expenses
- Lawsuits related to accidents and associated legal costs
5. Umbrella or Excess Liability Insurance
What is umbrella insurance?
Sometimes, your typical construction insurance coverage might not be enough, especially if you’re facing serious financial losses. Excess liability/umbrella insurance extends the coverage limits of your policies, just in case something catastrophic happens.
Why do you need supplemental coverage?
In construction, it’s always better to be safe than sorry. If you typically work on higher-risk projects with multiple subcontractors, umbrella insurance can give you the peace of mind that you’ll stay financially stable, even if something happens.
When it might be needed:
Some contracts, especially those financed by larger clients or government entities, may require you to carry an excess liability policy.
6. Surety Bonds
What are surety bonds?
Surety bonds protect owners from losing money on a project. While they provide a level of financial protection like insurance, bonds are only tied to one project, while your insurance policy can cover multiple builds.
3 common types of surety bonds:
- Bid bonds - Bid bonds guarantee that the principal contractor has the capacity to finish the contract as bid.
- Performance bonds - Performance bonds guarantee that the contractor will perform the work as laid out in the contract. If the contractor doesn’t deliver quality work, disregards the contract terms, or defaults, the owner can make a claim to the surety company.
- Payment bonds - A payment bond guarantees that the GC will pay all subcontractors and vendors for their labor and materials. These bonds are designed to protect project owners, but also extend protection against nonpayment to subs and suppliers.
Why do you need them?
Surety bonds don’t protect you as the contractor, so why do you need them? If you want to take on bigger, more profitable jobs, you’ll have to buy surety bonds. Larger projects = more risk, so most owners on these types of jobs require bonds.
🔎 Dive Deeper: We teamed up with Brad Ballew, President of Ballew Surety Agency to do a deep dive into surety bonds. Read it now.
7. Other Specialized Construction Insurance
Depending on your type of business, you may need to consider specialized insurance policies. A few types of coverage that fall under this category include:
Environmental/Pollution Liability Insurance - If you frequently work with hazardous materials, pollution liability insurance will protect you from property damage or bodily injury claims stemming from hazardous waste or materials released from your operations. This type of policy covers you during and after a project is completed.
Inland Marine Insurance - This type of construction insurance covers equipment, tools, and project materials while they’re being transported to and from a jobsite by land.
Construction Wrap-Up Insurance (OCIP/CCIP) - Wrap-up insurance is an all-encompassing policy that protects all contractors and subcontractors working on large projects. These policies are usually purchased as an OCIP (bought by the owner) or CCIP (bought by the general contractor). They have more administrative time, but save money overall on insurance for the project.
Subcontractor Default Insurance - Subcontractor default insurance offers protection in the event that a subcontractor fails to meet the terms of their contract.
How Construction Insurance Premiums Are Calculated
Just like health insurance, the cost of construction insurance will vary by policy. Your premium will be influenced by a few different things, including:
- Your company’s revenue
- Your payroll cost
- Your business’s claims history, safety record, and credit score
- Policy coverage limits and deductibles
Basically, the insurance company wants to see how risky your business is. If you have more green flags than red, your pricing will reflect that.
A Few Best Practices to Keep in Mind
Before we wrap up, here are a few tips to get the most out of your construction insurance policies:
Work with an insurance broker that specializes in the construction industry - While it might seem more convenient to get your business insurance from a big-name insurance company, we recommend choosing a provider that specializes in construction. Because they work with contractors every day, they’ll be able to outline your coverage options and help you choose the specific policies you need. Plus, they can help you bundle multiple policies together into a package that makes sense for your unique business needs.
Get proof of coverage - Project owners don’t want to bring just anyone onto their build. Once you win a bid, you’ll need to show proof of insurance in the form of a certificate of insurance (COI). Your insurance broker will create this document for you.
Make time for risk management - Construction insurance isn’t a set-it-and-forget-it type of thing. You have to actively manage risk within your business to avoid claims being made against you. The best piece of advice we can give you here is that risk management isn’t just the project manager’s responsibility — risk management is everyone’s problem. Take the time to implement solid risk management practices on the construction site, and everyone will benefit. Remember: The lower your risk, the less expensive you are to insure.
Wrapping Up
If you think construction insurance is just another set of entries on your growing list of overhead costs, you’re not wrong. Yes, insurance policies are expensive. But if the alternative is losing your business entirely, we think it more than pays for itself. If you want to build a construction business that can thrive for decades to come, you have to protect it with insurance.